John Wiley & Sons Inc (WLY) 2011 Q4 法說會逐字稿

Ladies and gentlemen, hello and welcome to today's John Wiley & Sons quarterly earnings call.

Before introducing Mr.

Steve Smith, President and Chief Executive Officer, I would like to remind you that this call is being recorded, and may include forward-looking statements.

You should not rely on such statements as actual results may differ materially, and are subject to factors that are discussed and detail in the Company's 10-K and 10-Q filings with the SEC.

The Company does not undertake any obligations to update or revise forward-looking statements to reflect subsequent events or circumstances.

Please also note that all your lines are on listen-only mode.

There will be time for Q&A towards the conclusion of this call.

(Operator Instructions).

And now to start off our call, Mr.

Smith, please go ahead.

Good afternoon.

Thank you for participating in Wiley's fiscal year 2011 fourth-quarter investor conference call.

I'll with Ellis Cousens, Executive Vice President and Chief Financial and Operations Officer, and Brian Campbell, Director of Investor Relations.

I'll take a few minutes to provide an overview of Wiley's performance in the fourth-quarter and full year and we'll then respond to your questions and comments.

We are pleased at Wiley's overall performance in challenging market conditions for the full year fiscal 2011, in which we are reporting record highs for key financial measures including revenue, earnings per share, and free cash flow.

Wiley's currency-adjusted revenue growth of 4% versus prior year was in line with our guidance of mid-single digits, while adjusted EPS growth of 12%, excluding all unusual charges, benefits from foreign exchange exceeded our guidance.

EPS on a US GAAP basis increased 16% over prior-year, or 19% excluding foreign exchange.

For the quarter, revenue of $445 million was up 2%, but declined by less than a point on a currency-neutral basis as expected.

STMS was flat in the quarter, primarily due to the acceleration of subscription contract agreements into the previous quarter.

A strong quarter for Higher Education was offset by a decline in P/T revenue, as a result of lower sales reported in the US.

Earnings per share of 46%, while flat in the quarter, while down 5% on a currency-neutral basis, was a bit better than anticipated.

For the full fiscal year, revenue of $1.740 billion increased on a currency-neutral basis by 4%, or 3% including negative foreign exchange.

Adjusted EPS for the fiscal of $2.90 increased 15%, excluding the impact of currency, or 12% including it, and excluding a $0.10 third quarter bad debt charge related to Borders, and $0.17 impairment and restructuring charges reported in the prior year, but including $0.07 per share deferred income tax benefit on a reduction in the UK tax receipt tax rate in the first quarter of fiscal year 2011.

Top line results, lower interest expense and a lower effective tax rate were partially offset by higher technology investment and increase in the number of shares outstanding.

Gross profit as a percent of revenue increased 0.5% over prior year to 69.1%, reflecting increased sales in digital products and eBooks, lower production costs due to offshoring, and lower inventory provisions in P/T and Higher Education.

All three businesses reported gross margin improvement.

On a currency-neutral basis, full year operating and administrative expenses increased 2% or 4% including the $9 million bad debt charge related to Borders, reflecting increases in technology spending due to digital initiatives, increases in pension and employment costs, facility costs and journal editorial costs, partially offset by lower journal costs due to print reduction initiatives.

Free cash flow for fiscal 2011 of $270 million increased 25% over prior-year, reflecting the combined effect of increased cash earnings, lower pension contributions, timing and growth of journal subscription cash collections and lower working capital.

Net debt, that's long term debt less cash and cash equivalents, was reduced from prior year by $243 million to $252 million.

Day sales outstanding improved by 1.4 days.

Inventory decreased from a year ago, due to smaller print runs, resulting from the growth in eBook sales partially offset by the increased higher education inventory in preparation for the launch of a large frontlist for the coming sales season.

In regards to free cash utilization, we reduced long term debt by $195 million, paid out $39 million in dividends and repurchased $28 million worth of shares.

This morning, Wiley announced the quarterly dividend rate of 25%, our 17th annual increase.

At the end of April, cash on hand was approximately $201 million.

Now I'd like to provide some information regarding performances at Wiley's global businesses.

STMS revenue for the quarter was up 3% to $287 million, but flat, excluding foreign exchange.

The softer quarter was as expected, and as a result of approximately $10 million of accelerated journal billings reported in the third quarter.

Excluding this timing issue, new general subscriptions, new society visits, backfile sales and eBook revenue drove the results for the quarter.

Direct contribution to the profit for the quarter of $131 million was essentially flat on a currency-neutral basis.

For the full year, STMS revenue increased 4% on a currency-neutral basis to $999 million, and was up 1%, including the adverse effect of foreign exchange.

Adjusted direct contribution to profit for the nine months increased 5% to $425 million on a currency-neutral basis, and increased 1%, including FX.

Adjusted direct contribution to profit, excludes asset impairment and restructuring charges of $15 million in the prior year.

For fiscal year 2011, growth in journal subscription billings was in line with our expectations.

Journal backfile sales were performing above expectations and finished the year 31% ahead of prior-year.

STMS book sales of fiscal 2011 increased 9% over prior-year on a currency-neutral basis.

Digital book sales drove a strong performance, including the benefit of a significant online book sale to a Saudi Arabian consortium reported in the first quarter.

Print sales are also holding out well across all regions.

Digital book sales now account for 16% of total STMS book sales.

Total digital revenue accounted for 59% of full-year STMS revenue, up from 56% a year ago.

Journal subscription receipts for calendar year 2011 are showing roughly 3% growth, with 95% of targeted business closed.

In the fourth quarter, STMS signed new contracts with Society to publish two new journals, and renewed our extended contracts to publish 23 journals.

Only one journal agreement, with modest revenue, was not renewed.

Fourth-quarter Professional Trade revenue of $110 million on a currency-neutral basis -- fell 4% on a currency-neutral basis, or 3% including the adverse effect of foreign currency.

The decline in revenue is mainly attributable to the fall in sales from a single account.

The reduction in sales through Borders impacted several publishing categories, most notably, consumer lines.

Revenues in the business, finance and professional education categories continued to grow, powered by the rapid growth in sales of eBooks and other digital products such as the online version of the Leadership Practices Inventory, or E-LPI.

Direct contribution to profit fell 1% to $24 million for the fourth quarter, reflecting lower top line sales, mitigated by lower expenses and accrued incentive compensation.

For the full year, P/T revenue grew 2% to $437 million or 1% on a currency-neutral basis.

eBook sales for the full year account for approximately 5% of total P/T revenue increasing almost threefold versus prior year, as consumers loaded up new devices with key frontlist and deep backlist titles.

Our focus on multiple sales channels helped us withstand the impact of Borders' bankruptcy filing.

Sales to online accounts, mass market retailers, custom and proprietary customers, all grew in fiscal year 2011.

Outside the US, Professional Trade revenues grew significantly in the UK, Germany, Canada and Asia.

Digital revenue in fiscal 2011 accounted for 10% of total PT revenue, up from 7% a year earlier.

On a reported basis, full-year direct contribution to profit of $95 million was down 5%.

Excluding the Borders bad debt charge of $9 million, and unfavorable foreign exchange, direct contribution to profit for the year rose 5% to $105 million, reflecting the top line performance and improved margins from the growth in eBook sales.

On a currency-neutral basis, the business program revenues advanced 6% in the quarter, with leadership investment and marketing list performing well.

Consumer declined 7% in the quarter due to the Borders disruption.

Technology was down 10% to $22 million against a very strong quarter in the prior year.

The Wiley technology program retained its number one market ranking in a tough market environment.

Global education in fourth quarter revenue grew 8% to $48 million or 6%, excluding the effects of foreign currency.

Full-year revenue of $307 million is 7% ahead of prior year on a currency-neutral basis, reflecting market share gains around the world.

Year-on-year growth was achieved in nearly all subjects, with particularly strong growth in engineering, computer science and science.

Global billings of Wiley Plus were $33 million for the year, and reflect annual growth of 8%.

Digital-only sales of Wiley Plus grew 18% to $13 million and account for approximately 40% of Wiley Plus sales.

Wiley Plus growth rates slowed somewhat in fiscal year 2011 compared with previous years as expected, as we prepare for the release of a large sales season in 2011 frontlist based on an updated version of software.

Excluding Wiley Plus, sales from eBooks, digital content sold directly to institutions, fine traditions and custom publishing grew by 36% year-to-date and now represent 17% of global education.

Sales growth was experienced around the world with the exception of Australia, where delays in major national curriculum reform limited the growth opportunities to our school business.

Gross profit improved by $16 million for the year, excluding the effect of foreign currency, with the gross margin of 66.7% reflecting an improvement of 1.2% over prior-year as a percentage of revenue.

Increased volume and higher digital revenue continued to drive the improvement.

Full-year direct contribution of profit increased 15% on a currency-neutral basis versus prior year to $101 million.

Top line growth improved gross margin from higher digital revenue, and cost containment drove these results.

In conclusion, we are encouraged by our performance in fiscal year 2011.

We are gaining share in the markets we serve.

We are making steady progress in the transition to digital business models, which remain critical to our ability to serve the needs of our customers.

Based on our momentum from 2011, market conditions are leading indicators, we are providing fiscal year 2012 guidance of currency-neutral, mid-single digit revenue growth, and EPS in a range of $3.15 to $3.20.

With that as background, we welcome your comments and questions.

(Operator Instructions).

Our first question is from Mr.

Dave Lewis, JPMorgan.

Hi, guys.

Good afternoon.

Can you, I think this first question is for Ellis.

Ellis, can you walk us through some of the below the gross profit line elements of the income statement in technology and distribution costs and how we should think about them, as well as the tax rate for fiscal 2012?

Thanks.

Okay, thanks, Dave for the question.

So let me start with the tax rate.

That's always the easiest and shortest answer.

I would use a rate of somewhere between 28% and 29%, something on that order.

In terms of looking at kind of the shared service expenses, and what some of the growth drivers were in 2011 as we exited the year and how that might affect going forward here in 2012.

First thing I'll say is that there is some timing in the fourth quarter that drove some of those rates of growth higher versus prior year; however, we do expect continued growth as we've talked to frequently, and technology spent, maybe not at the same rate that you saw in the fourth quarter and the year.

Particularly one thing to note in the year, which affected at least the last three quarters of the year, is as you recall, we put Wiley online library in service, so we began to depreciate that pretty substantial investment that had been capitalized to the last point in time, so that is sort of a higher level of depreciation of capitalized software.

So we had three quarters of that in 2011 and we'll have four quarters of that in 2012.

We continue to spend against the whole plethora of issues, sorry, opportunities in technology, and I will say that looking at this, thinking about this earlier, I certainly anticipated this question as you might imagine, is that when you see our 10-K which will be filed at the end of next week, or the very beginning of the following week, we provide a forecast of capital spending, composition and author advances and you'll see that for the year to come, that author advances and composition spending are just very slight growth associated with those two, and yet you'll see growth in capital spending of nearly, or about $20 million or so and almost all of that growth in capital spending is coming from software development and coming from computer hardware to support, essentially, products.

So as you continue to see the shift in transition of the business from print to digital, you'll see more and more of what is kind of product development spend shifting from traditional -- to some of the traditional areas around composition and author advances, principally composition, and into software development and capabilities, which are in and of themselves either capabilities to enable product that's digital, or digital product itself.

So you should not be surprised to see growth in technology spend, as I've talked to, and we've talked to for a number of quarters and a number of years.

So there is a little bit of increased spending, I should say, sorry, amortization that's sort of -- depreciation that is driving some of the growth year on year.

We'll see a little bit more of that into next year, because of the fourth quarter so to speak being amortized into the fiscal year.

Distribution spending was up 2%, some of that driven by some one-time items, principally in the fourth quarter, so I don't expect to see high levels of growth in distribution spend, but nonetheless, despite what I just said about print product and so forth, print volumes continue to grow, and we continue to look for opportunities to drive down the marginal costs of physical distribution, of physical product.

And some of those require certain investments to be able to do some of that.

Some of that is in some of the capital spending in the form of technology.

Some of it will be quite frankly in facilities-related capital spending in terms of certain automation and equipment that we might provide to reduce the marginal costs of shipping books and allowing us to move to shorter print runs to more closely match orders to what our print volumes are.

You'll see some of that in terms of how we manage inventory.

You'll see inventory has come down somewhat, and that's a mix of factors.

So I think all in all, if you need to sort of take a lot of these things together, looking at everything as I just described from inventory to how we're managing distribution spend, so that the interplay between capital spending, particularly on software development and computer hardware, and technology services, as shown in the segment reporting.

So all in all, I think over the course of the year, there was some one-time items at the end of the year or the fourth quarter, particularly again in distribution and a little bit in technology, as we sort of begin to lap the amortization of or depreciation of the investments in online library, will normalize a bit so to speak, but again, one should anticipate reasonably high levels of growth in technology spend as we continue to transition to digital.

Now we see some of the benefits there, sorry for the long-winded answer but you should expect nothing less, is that some of that is showing up in gross margin improvements as cost of sales are lower.

Also driving down cost of sales are some of our offshoring and outsourcing activities, and we're moving and have moved a certain amount of work that we formerly did in higher cost locations in the United States and Western Europe to our offshoring and outsourcing hub in Singapore, so we've been harvesting some benefits outside of the digital transition in terms of cost of sales from some of that activity as well, and we expect to see more of that in the future.

Thanks, Ellis, and I'll ask one more and hop off and perhaps come back.

Steve, could you just give us your assessment of the Higher Ed market and how you think it will perform in this coming fiscal year and the two add-ons to the Higher Ed question is, what incremental capabilities are included in the new software?

Does that allow students to purchase the Wiley Plus and circumvent the teacher approval, and then the third part is just if you could give an assessment of the rental market and where you think that stands right now, how much its growing and how much it's affecting you.

Sure.

Thanks, Dave.

So just in terms of the overall Higher Ed market, as you heard me say, we grew 7% in the fiscal year just closed, we outperformed the market a little, we think the market grew about 5%.

As we look forward to the coming year, we see the market being fairly similar to the year, there are certainly some headwinds in terms of funding for public institutions, some enrollment challenges in the proprietary sector, but at the same time, I think more and more institutions are recognizing that digital courses and digital technology is enabling them to really improve the productivity of teaching and learning and so we see an opportunity for publishers like Wiley to continue to grow.

As well as we have done in the last year, we expect to continue to grow faster outside the United States than inside the United States, tapping into opportunities in the emerging markets, in particular and Asia and in the Middle East but also continuing our growth trajectory in Australia and Canada and in Europe.

So our overall prediction is for a reasonably buoyant market, and one that we -- based on the strength of our frontlist and the launch of Wiley Plus 5.0, we expect to compete strongly in.

To your question about what's different in the new release of Wiley Plus, which we're calling Release 5.0, the key thing there is around more interactivity for the student and the potential for more customization and your specific point, yes this will allow a standalone version by students, and that's not to say that it isn't still built primarily to be adopted and used in a classroom setting, but students who were taking any course could also use a standalone version of Wiley Plus and get utility and great benefit from it.

There's a lot more in terms of the functionality, and that we could perhaps talk to you about at our next investor meeting in September, where we could give some product demos and some greater ideas.

It has been a long time in the works and we're delighted to have it ready for market, and its been [soft-tested] extensively over the last six months, so as we go to market with it now, we're expecting that to really resonate with our customers.

And your last point I think was on rental and from that perspective, the rental market is still a little bit intriguing.

We don't see rental having made a major impact on new book sales.

We know that rental, the rental business model competes with sales of new books but also with sales of used books, so we think it may, primarily an impact on used books.

There's nothing to suggest that from our perspective, the story is going to be very different in fiscal 2012 than it was in fiscal 2011, and at a point that we've made, I think on several occasions in the past is, our strategy of moving the business more rapidly to digital business models and digital revenues is pretty robust in the context of the changes in the distribution channel for print books.

That's great.

Thanks, Steve.

Thank you, Dave.

Next we have Drew Crum from Stifel Nicolaus.

Thanks.

Good afternoon, everyone.

I have a couple questions on your fiscal 2012 guidance.

First, I'd like to get a sense as to what type of growth you're looking for, for each business from a top line perspective and also is there any accretion from redeployment of your free cash flow contemplated in the EPS guidance you guys have given?

Drew, this is Ellis.

So as you know from a top line perspective, we really don't parse it out.

I think you could take some of what Steve has answered with respect to higher education, and some of what we said in terms of how general subscriptions are tracking relative to expectations for calendar year 2011, can probably give you enough to help you figure that out a bit.

In terms of your question again, could you be a little bit more specific?

I wasn't quite sure of the angle of the question.

So the $315 million to $320 million of earnings guidance you're giving for fiscal 2012, does that contemplate any redeployment of free cash flow?

Are there plans to continue to pay down debt, buy back stock, accretive acquisitions, et cetera?

It does not include anything with respect to acquisitions but it does include some level of anticipation of redeployment of cash to other uses, some of which you've described.

Principally though focusing again the key drivers of those numbers and metrics are organic growth, and so Steve spoke to in terms of opportunities in the marketplace around Higher Ed, some of what we've seen with respect to STMS, and then opportunities in the professional trade area.

Okay, and guys, just want to get your perspective on the Board's rationale behind the dividend increase earlier today.

Looking at your payout ratio based on the fiscal 2011 free cash flow you generated, it's still below the 10 year average, so just wanted to get a sense as to how you're thinking about the dividend, so that's my question.

Yes, Drew.

In terms of the dividend recommendation, so it was recommended at 25%, that's a recommendation that Steve and I constructed based upon discussion and dialogue, and considering all of those things that you described with respect to, and we discussed before on these calls regarding debt reduction, where we are with respect to our net debt position, which I've described before as being more than comfortable with where we are.

And also taking into account, as far as one can foresee, which isn't quite frankly, very far, with respect to very large acquisitions, versus smaller acquisitions and I've said many times before, and I believe it's still the case, and I have no reason to sort of think differently is that as long as we have access to capital markets, which I believe we do, that there's no need for us to accumulate cash for the purpose of having a war chest or something like that.

So the deployment of cash against other alternatives, whether the acquisitions which are somewhat opportunistic, we can make some of those things happen, and against share repurchase and dividend increases, those are all in the mix.

And looking at our free cash flow position certainly generating $270 million free cash flow in fiscal 2011 certainly having a meaningful dividend increase beyond sort of what has become maybe a little bit hum drum as I might have heard from some comments from some investors with respect to what we've done in the past.

I thought it was time to recommend an adjustment to ratchet that up a bit more than in the past, so 25% seemed to be a reasonable level to settle upon.

We did look at comparables with respect to other publishing and media companies.

Of course that's a very imperfect sort of look.

We looked at where dividend patterns and shifts and changes have happened across the industry generally over the last let's say 12 months or so, and felt that the 25% increase was appropriate.

I wouldn't read any signal into that or not, in terms of what forward changes we might make with respect to dividends.

And Ellis, looking at the balance sheet, the deferred revenue looks like it's up about 17% year on year.

Can you just kind of walk us through what's driving that, and what the implications are looking forward with respect to that account?

Some of that has to do with some of what Steve described before, with respect to shift into the third and into the fourth quarter but we're talking about year-end here.

Principally what happened inasmuch as we're able to sort of close contracts more quickly, shall we say, relative to the past, so that we were able to sign up more business by the end of the third quarter, meaning the end of January and continued apace in the fourth quarter but not accelerating further beyond that.

It meant that by the end of the year those contracts which had been signed, sealed and delivered, so to speak, had more time to get paid, so to speak, before the end of the fiscal year.

So as a result, we had more cash in the door, so higher billings, higher cash, higher deferred subscription liability.

I wouldn't read anything into that with respect to growth year-on-year.

It has to do with timing.

It's the end of April, it's a particular day literally, but it does speak to quite frankly the fact that we're able to close a significant amount of business relatively early in the calendar year, more so than in the past, comparatively versus prior year.

Steve did mention we are on track to deliver what our expectation was in terms of subscription growth of roughly 3% or so, so we're feeling good about where we are.

I wouldn't read a lot beyond that.

That would also potentially answer a question you may have in terms of free cash flow, so some of the cash that would have otherwise been collected in fiscal 2012 related to calendar year 2011 subscriptions was collected in fiscal 2011.

So that level of increase which was a quote, surprise, to you or maybe that wasn't a quote but seems like a very robust growth in free cash flow was, while not a surprise to us because we knew as it was happening, it is in fact somewhat sort of a timing-related, I wouldn't call it an issue, it's a timing-related opportunity.

So some of the cash that would have otherwise been in fiscal 2012 has occurred already in fiscal 2011.

Okay, thanks, and my last question and I'll jump back into the queue pertains to Professional Trade.

As far as Borders is concerned, the revenue foregone that you described in the fourth quarter, should we expect a similar amount over the next two quarters before you anniversary that and looking at Barnes & Noble, I know that's an important account for you guys.

What percentage of the mix is that and with Liberty Media looking to buy Barnes & Noble, how are you adjusting your business, your pricing, et cetera?

How are you anticipating that will impact, I guess, the print side of the business for your Professional Trade?

This is Steve.

So on your first point about Borders, we are actually still selling to Borders.

We're selling to them on a cash basis, so we are still actually taking monthly revenues at the moment, although it's much lower than it would have been a year ago.

What we can't exactly quantify is how much of the business that had previously gone through Borders is now going through other channels and we are continuing to see good growth in other bricks and mortar channels.

We're seeing good growth through online accounts, through mass market, so I don't think we would read across directly from the fourth quarter and say we'll see exactly the same kind of shortfall until we come to the anniversary date, as you put it, but it is a little hard to know how much of the business that went through Borders will ultimately find its way through other channels, we suspect a fair proportion of it.

I can't comment on the percentage of our business that goes through Barnes & Noble.

All I can tell you is our business with Barnes & Noble continues to grow and we're not only selling to them print, but we're also selling to the Nook, to their digital reader and those sales have been growing very nicely, and they're making good progress with that.

We've been watching the story of Liberty Media as well.

We believe that a good future with Barnes & Noble as a financially stable partner, we are hoping that will play out over time, as we expect it will.

Okay, thanks guys.

Thank you.

(Operator Instructions).

Next we have Torin Eastburn.

Go ahead, please.

Sorry, Torin Eastburn from CJS Securities.

Good afternoon.

My first question is about your gross margins.

As you highlight in your press release and also on this call, an increasing number of your sales are coming through digital distribution.

Can you discuss and maybe even quantify what kind of changes you think could be in store across all three businesses as the shift continues?

Yes, so this is Ellis.

I won't speak specifically to numbers.

We can talk to trend, and we can actually certainly talk to historical trend, and how that might play sort of a role in the future.

So as I discussed earlier, there are a number of drivers providing for gross margin improvement, most notably, so that the transition to digital which is either further along or lesser along in certain of our business, certainly not as far along in Professional Trade, but as noted relatively high growth in eBooks which provide for margin opportunities and improvement, so it depends on the trajectory of sort of the development of the eBook market so to speak and some other digital opportunities that we've talked to previously in the Professional Trade area.

And then I'll make a general comment about all three businesses in terms of some opportunities around cost of sales.

But in STMS, it is as I think you know, that business is, while not all of our revenue is derived from digital product, all of our journals are digitized.

Many of our books are available online, but not all of them, and while we continue to have growth in both print book, sorry we have continue to have growth in both print books and online books, we're transitioning more and more of our print book business in STMS to online, in part facilitated by the launch of Wiley Online Library back in August of last year so one might expect there could be some margin benefit or should be some margin benefit associated from that.

We would expect that in an advertising market, which could develop and has been developing favorably at least again, Online Library provides for an opportunity for online advertising that did not exist in a material way when we had interscience as the platform, so some margin opportunities there are coming from what is a relatively high margin business so it's not a transitional opportunity, but more of a growth opportunity from an advertising perspective in an online environment.

And Higher Education is a business that is sort of part way through a transition to digital.

Steve spoke to sort of a frontlist that will be driven by, in part by, the launch of a Wiley Plus 5.0, the next launch, sorry the new service that we'll be launching.

We'll also have, by the way, the predecessor system will also be up and running so it's not everything through 5.0.

That we would expect would drive some incremental sales and some sales opportunity, so some margin opportunity there.

Looking longer-term, kind of moving more of that business from print textbooks into digital products, including Wiley Plus but other things as well, some of which may be custom in nature.

So we have a resource and a capability called Custom Select, which can be used both in print and in digital form.

We also have digital books and eBooks, and various forms of digital textbook material for students to use as well.

We would expect to see over the longer-term, so let's say out three to five years or so, that business would be more digital than print, and that would tend to drive, and we expect to drive for positive margins from a top line perspective.

To sort of reflect back on what would be impacting all those businesses, as something that I mentioned earlier in the question that was asked having to do with more activity and more focus on moving more and more of the activities that feed into cost of sales so to speak, whether it be print or digital, to lower-cost areas of the world which would principally be parts of Asia, rather than where much of that presently or has been located and presently still is, which is in the United States and Western Europe, which are generally higher-cost markets in which to operate.

We can get the same quality of services to a large degree in those areas, so we're using both a combination of insourced offshore capabilities based out of Singapore and also in Korolyov in Russia, where we have the very large development and growing development organization.

So we're focusing growth in technology resource.

People are developing both the back end of our system support, but most importantly, the front end of our systems capabilities and products and services in lower cost markets so we're shifting not just the product mix but also how we derive that product mix into lower-cost environments, again principally driven through a hub in Singapore, and then on to outsource locations in the Philippines, India, Malaysia and other parts of Asia.

And all of those things, as you would imagine, speak to margin benefits.

Quantifying them and timing those is rather difficult to do, and not something I'd want to commit to other than say from a direction and trend perspective, those are positive things.

And my only other question-- are you able to share with us what interest expense is contemplated in your guidance?

We don't provide that, typically, but I can say it will be lower for two reasons.

One is that we expect debt itself to be reduced, so we speak to net debt but certainly there is long term debt associated and is on our balance sheet.

Also a swap that we had in place.

We had two swaps or actually we still have one swap in place, a swap that was put in place early in the cycle in terms of raising that debt, was at higher cost and current market conditions, so that swap rolled off so there will be an interest rate benefit associated with that in addition to the principal balance behind that.

We still have one swap in place, but I believe it's $125 million at 130 basis points, 1.3%, which is roughly in line with current market conditions.

That swap runs until the middle of January 2012, but to note, is that we have a refinancing upcoming with respect to our revolving credit facility at which time we'll refinance both the revolving credit facility and take out the term loan.

At least that's the current thinking.

I can tell you that the margins and spreads while the underlying base rate is obviously no different but spreads are different than they were when we put that debt in place.

We're currently operating in a 50 basis point spread environment.

I can assure you with all confidence that our spreads will be higher than that, even at lower levels of leverage, simply because of market conditions at present.

Sure.

But that somewhat offsets what I said earlier about in terms of lower average rate, a piece of it.

All right, thank you, Ellis.

You're welcome.

(Operator Instructions).

Looks like our last question is coming from JPMorgan, Mr.

Dave Lewis.

Go ahead, please.

Mr.

Lewis, go ahead, please.

Thanks.

Hi, guys.

I just want to ask one or two more quick ones.

Steve, I think there was Congressional International Anti-Piracy Caucus in Washington last month and I just wanted to hear your thoughts, given that digital transition is happening very rapidly, you've commented on this before at I think the most recent Investor Day but I just wanted to hear your thoughts on that and what the exposure is and where that stands right now.

Thanks.

Yes, so Dave, specifically, digital piracy, and just remind listeners on the call, the Company has been, well our industry has been battling to protect intellectual property for as long as there's been a publishing industry, and we made a lot of progress actually in the last 25 years in combating print piracy around the world, particularly in Asia where whole new markets came on stream for us during that period, as we were able to get good copyright enforcement, along with active campaigns to educate the public.

Digital piracy, the difference is perhaps the fact that it's a little less visible and sometimes easier for people to distribute from peer to peer.

We don't estimate that we are suffering heavy losses due to digital piracy today but it is certainly necessary for us to remain very vigilant, for us to work with our partners in the industry, for us to continue to work with agencies like the USTR, the Department of Commerce, in order to make sure that the US government supports our efforts to protect not just intellectual property, but protect the interests of American business and American jobs and we feel that our arguments resound very well with Washington and we get a lot of support in that.

We have a team of people working in our own internal legal department who run a daily campaign of issuing takedown notices for people who are putting content illegitimately up on to file sharing sites and into cyber lockers and there's an industry initiative there, but each publisher is really working on its own copyright material.

It's a little bit like a finger in the dike.

The damages themselves are not material, but we have to keep our activity up in order to make sure that people understand that our content is protected by copyright law, and that it's not to be shared, except within the confines of a fair use, so we don't see large scale commercial piracy.

One of the things we also do is we track usage of our online sites, so a site like or service like Wiley Online Library, if we see unusual activity from any location around the world that indicates that someone may be crawling and systematically downloading our content for nefarious purposes, we take rapid actions to talk to the licensee to whom we sold the content in the first place, and we so far have been successful in being able to shut those off whenever that's happened.

So I'm not sure if that answers your question.

It's something that we have to be vigilant about.

We are vigilant.

We have a team of people focusing on it.

We have good support from government, we cooperate with the American Association of Publishers, associations around the world, and we're holding our ground.

That's great.

Steve, just last one for me.

I was wondering if you could just give investors your thoughts on the pace of adoption with eBooks right now, on the back of the Book Expo and the launch of multiple new eReaders, how you're feeling about that trend right now and the second part of the question is just self-publishing and how you see that impacting Wiley.

I think that at the investor day, the feedback was that it was helping.

It was redirecting some authors towards Wiley, but how you see self-publishing evolving at the current date.

Thanks.

So on your first question, I think we view the transformation in the eBook market with great excitement.

The huge growth in the install base of eReaders and tablets, devices which enable people to access our content from wherever they are in the world in the way they want it, at the time they want it, can only be an opportunity for us and we have -- we're also delighted to have multiple channels to market so we're working with a very wide range of eBook vendors who are selling eBooks in different formats to different devices.

Of course there's going to be further development and probably some device convergence and who knows what, in three, four, five years time people will be using to read our kind of content, but what we feel pretty comfortable about is that people are finding that it's easier to access their content if they recognize the value of that content, and they're willing to pay a fair price to get access to it.

So as I mentioned, eBooks are now 5% of our P&T business, it's about 16% of STMS book revenues or digital books, we only expect that to continue to grow and whether it's an eBook or an service like Wiley Plus, students I think will also increasingly find that rather than carrying a heavy textbook around campus, to be able to access the content in the way that they want to access it, through some kind of portable device is likely to be a big part of our future, so we view it as a great opportunity, and not least because it also takes out so much of the inefficiency of the print book distribution model and that's been a drag on companies like Wiley but also our customers for a long time.

With regard to self-publishing, I think the proliferation of different business models and new ways for people to communicate with each other do open up opportunities for people to more often think about do I need to go to a professional publisher like Wiley, or can I get my message out just by putting up on the web.

But I think all of us know that with all of the chatter and all of the noise and the huge volume of information that's out there on the web, people need assistance in navigating to the content that they need that is of the high quality that helps serve their need and ultimately results in better outcomes for them as the users of that content.

We think Wiley's really well-positioned to provide people with a brand and with a partnership that helps them develop and distribute their content in a way that makes it more accessible to people, makes it more discoverable.

And people look to quality brands to help navigate through the massive content that's up there on the web, so it's not to say that some of our authors wouldn't or might not at some point consider a self-publishing option.

We actually have a number of authors in house who started as self-publishers, and when they had a little bit of success they realized actually, in order to get their message out there, they needed the help of a Company like Wiley and we signed them under contract to publish with us.

That's great.

Thanks, Steve.

Thank you.

Looks like that was our last question.

Back to you, Mr.

Smith.

Okay, well we look forward to talking to you again in September and thanks very much for participation in the call.

Ladies and Gentlemen, thank you for your time and attendance.

You may now disconnect from the conference.

This conference is concluded.

Please enjoy the remainder of your afternoon.